#TalkMoneyWeek: Interest Rates and Inflation
Bank of England Interest rates cut ... good news?
The Bank of England finally cut interest rates to 5% at its August meeting after holding them at 5.25% seven times in a row. Interest rates affect the mortgage, credit card and savings rates for millions of people across the UK.
Borrowers with a fixed rate mortgage will not be affected now, but when the fixed rate finishes and the borrower has to remortgage any decrease is good news. The cheapest two year fixed rate on the 21st October 2024 was 3.9% with a fee and 4.19% with no fee. Interestingly the cheapest 5 year fixed was 3.75% with a fee or 3.92% with no fee.
So why is a 5 year fixed cheaper that a 2 year fixed? Quite simply, lenders believe that interest rates will continue to fall over the 5 year period and are prepared to put their money on it ... literally.
Should I fix my mortgage for 2 years or 5 years? Well, yes and no: It depends if you need or want the certainty of knowing how long your payments are fixed for and how any interest rate rise will affect your finances?
Interest rates and inflation are indirectly linked. The Bank of England moves rates up and down in order to control UK inflation - which is the increase in the price of something over time (see graph above). When inflation is high, the Bank may decide to raise rates to keep it at or near the 2% target. The idea is to encourage people to spend less, to help bring inflation down by reducing demand. Once this starts to happen, the Bank may hold rates, or cut them. The reduction is good news for borrowers but not such good news for savers as banks have already contacted savers informing them of interest rate cuts.
If you've got a mortgage, find out about your mortgage rate interest and see how long you've got your fixed rate for. If you've borrowed money, or have savings, take a look at how interest rates have affected you. Chat to your family, friends and colleagues - #talkmoney week is a great to get chatting and finding out more - #DoOneThing
For lots of money-saving tips, also download our FREE 'reducing everyday living costs' booklet and start saving today
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Interest rates and inflation are important because they affect how expensive things are and how money grows over time. Inflation means prices increase, while interest rates control borrowing and savings in the economy. When inflation rises, interest rates are often increased to reduce spending and keep prices stable. This post explains these ideas in a simple way and helps people understand everyday financial changes. When I was in college and handling a busy exam schedule, I felt stressed with deadlines and used do my online exam for me during a tough week so I could manage my workload better and stay organized.